Business Directories

Debt crisis could still spread to EU core: IMF

Frankfurt, May 12, 2011

Despite bailouts for Greece, Ireland and Portugal, Europe's debt crisis could still spread to core euro zone countries and the emerging economies of eastern Europe, the International Monetary Fund warned on Thursday.

The IMF said it stood ready to provide more aid to Greece if requested, though the country that triggered the sovereign debt crisis in 2009 still had plenty of untapped options for raising extra cash itself though privatisations.

Government sources in Athens meanwhile said international inspectors checking on Greece's compliance with its EU/IMF rescue package had found problems and were pressing for deeper spending cuts to cover a revenue shortfall.

"Contagion to the core euro area, and then onwards to emerging Europe, remains a tangible downside risk," the global lender's latest economic report on Europe said.

Finance ministers of the 17-nation single currency area are set to approve a 78 billion euro rescue plan for Portugal next Monday after Finland's prime minister-in-waiting clinched a deal to ensure parliamentary approval of the package.

But markets are increasingly concerned that Greece may never be able to pay back its 327 billion euro debt pile and will have to restructure, forcing losses on investors with severe consequences in the euro zone and beyond.

Asked whether there could be new aid package to help Greece work through its fiscal recovery programme, the IMF's European department director, Antonio Borges, said the fund was open to the possibility.

"The Greeks have to take the initiative, and so far they have not approached us. The IMF stands ready (to provide additional support) as a matter of policy," he told reporters.

However, Athens also had the potential to raise funds by selling state assets, with the 50 billion euros mentioned as a possible estimate of revenues from a privatisation programme "probably less than 20 percent of all the assets the Greeks could privatise".

The semi-annual IMF report said peripheral members of the euro zone needed to make "unrelenting" reform efforts to overcome the debt crisis and prevent it spreading further.

It also urged the European Central Bank to tread carefully on further rises in interest rates after last month's first increase since 2007, saying euro zone monetary policy could "afford to remain relatively accommodative".

Borges said the programme of austerity measures and structural reforms agreed a year ago was "probably the best thing that can happen" to Greece, though there was always the question of whether it was too ambitious.

Greece has implemented harsh cuts in public spending, public sector wages and pensions but has struggled to raise revenue due to a deep recession and chronic tax evasion. The government faces growing resistance to austerity highlighted by a general strike on Wednesday.

Greek yields soar

Greek sovereign bond yields soared to fresh euro-era highs on a growing belief that euro zone finance ministers will not deliver fresh aid for Athens at their monthly meeting next week.

The yield on two-year Greek bonds rose to an eye-watering 27 per cent.

By contrast, Portuguese and Irish yields eased after the Finnish deal on Lisbon's behalf removed one key political uncertainty.

The eurosceptical True Finns party, which scored big gains in last month's general election by vehemently opposing the Portuguese bailout, said it would not take part in talks to form the next Finnish government.

German Finance Minister Wolfgang Schaeuble told parliament in Berlin he saw considerable concern for Greece and doubts about its ability to return to capital markets.

Any fresh aid would have to be tied to clear conditions and could only be considered after EU and IMF inspectors, now in Athens, report on Greek compliance with its fiscal adjustment programme, he said.

Signs of disquiet are beginning to emerge from the EU/IMF/ECB troika mission, government sources in Athens said.

"They are forming an opinion that there are difficulties," said one senior government official who requested anonymity.

"They are concerned there is a high risk revenue targets will not be met and are pressing for more spending cuts."

The Washington-based fund's views about Greece are being closely watched ahead of next month's decision on whether Athens receives the next 12 billion euro ($17.27 billion) tranche of its 110 billion euro EU/IMF bailout.

Ireland and Greece are already dependent on 52.5 billion euros of IMF aid while Portugal is awaiting a 26-billion-euro three-year lifeline from the Fund.

Banks in the troubled countries are being kept above water by unlimited ECB liquidity, and the IMF said the central bank might need to extend that system again beyond June 12.

Financial markets and economists are overwhelmingly convinced that Greece will have to restructure its debt mountain and force investors to take losses.

But Borges said the IMF believed Greece was not bankrupt despite its high debt.

"All IMF programmes are based on debt sustainability, so as long as a programme is in place that means that the IMF believes Greek debt is sustainable," he said. – Reuters